IRS penalty for underpayments soars to 8%

The IRS has significantly increased the penalty for tax underpayments, nearly tripling it since 2021, with an interest rate rise from 3% to 8% as of October 1, 2023. This change poses a significant risk for gig economy workers and consultants who are likely to face substantial penalties if they underpay taxes. The penalties predominantly impact pay-as-you-go workers who don't have taxes withheld and fail to make estimated quarterly payments.

Even individuals with taxes withheld may incur the higher penalty if they fail to accurately calculate and pay taxes on additional income or receive higher-than-expected dividend payments. Changing withholdings to receive more cash can also lead to complications as your annual tax liability and associated penalties and interest will increase. The IRS collected $1.8 billion in underpayment penalties from approximately 12.2 million Americans in fiscal year 2022, prompting the increased penalty.

To avoid fines, individuals should pay at least 90% of their tax bill before filing or have less than a $1,000 difference, whichever is higher. Those who pay 100% of the previous year's tax bill or 110% for those earning over $150,000 or married taxpayers filing separately with at least $75,000 in income can also avoid penalties. The story emphasizes the importance of proactive tax management, urging individuals to assess their tax situation as the year-end approaches to prevent unexpected penalties.